Forensic Accounting for Divorces

By Beverly Bird

People who would never cheat in the normal course of life sometimes find themselves fighting dirty when it comes to the emotionally-charged issue of divorce. Whichever side of the fence you're on – whether you've found yourself doing things you never dreamed of or you suspect your spouse is up to something sneaky – a skillful forensic accountant will probably find out about it.

People who would never cheat in the normal course of life sometimes find themselves fighting dirty when it comes to the emotionally-charged issue of divorce. Whichever side of the fence you're on – whether you've found yourself doing things you never dreamed of or you suspect your spouse is up to something sneaky – a skillful forensic accountant will probably find out about it.

Hidden Income

Faced with paying alimony or child support, it's not unheard of for people to try to make sources of income disappear off the radar. Lowered income almost invariably means reduced support payments, but not everyone has the discipline to reduce spending at the same time they're trying to hide cash. A simple tool used by forensic accountants is to compare the costs of a spouse's lifestyle to his reported income. If the first greatly exceeds the latter, and his bills are being paid, it's a reasonable assumption that the extra money is coming from somewhere. The next step is to subpoena credit card statements to make sure he's not just deferring the payments to a later time. Another possibility is that a spouse is diverting income streams before the money hits his bank accounts or appears in his paychecks. He may defer employment or business compensation to a later time when the divorce will be behind him or make questionable personal loan payments to friends or family members, intending to take the money back when the divorce is over.

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Hidden Assets

A forensic accountant will also pour over income tax returns to identify assets that a spouse may not have mentioned in the financial affidavit required by most state divorce courts. These assets may be subject to division during divorce proceedings. Hints can appear in tax returns, but an untrained spouse may not be able to recognize them or decipher what they mean, even if she jointly signed the return. Telltale signs may appear on older tax returns, but not more recent ones. This might indicate that the assets existed at one point in time, but have since been sold or transferred into someone else's ownership.

Family Businesses

When one spouse is self-employed, a business entity offers untold opportunities to siphon off profits so it appears the enterprise isn't earning as much revenue as it actually does. This is particularly true with retail businesses that deal with a lot of cash payments, such as gas stations or restaurants. A forensic accountant can analyze business records for indications that the enterprise is taking in more income than a spouse is admitting to. Businesses must also be assigned a value in divorce because a portion is usually marital property and the other spouse is entitled to an interest. This generally requires the skills of a forensic divorce accountant. It's also possible that a spouse could transfer personal assets into the business's name in an effort to conceal their existence. A forensic accountant is alert for all these possibilities when he reviews business records.

Commingled Assets

A spouse's separate property is not usually available for distribution in a divorce. Separate assets include things you owned before you married, or received by way of gift or inheritance. Unfortunately, it's very common for unsuspecting spouses to commingle or transmute such assets, muddying the paper trail of ownership. This might be the case if you deposit marital money into a premarital account or use income generated by a premarital asset to pay household bills. Depending on the laws of your state, a forensic accountant may trace your original property and segregate what part of it has become marital so you can argue that you don't have to share the value of the entire asset with your spouse.

Determine if the Cost is Worth it

The expertise of a forensic accountant typically costs a great deal. Unless assets or income really do exist that are worth fighting for, you could easily spend more than you could possibly get back when they're uncovered. Before you give in to the temptation to hire an expert to get to the bottom of your soon-to-be ex's finances, consult with a lawyer to get an educated opinion as to whether it would be worth it.

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How Does Underreported Income Affect a Divorce?

References

Related articles

Penalty for Hiding Assets in a Divorce

Sometimes, in a divorce, one spouse will try to hide or conceal assets from the other spouse. For example, this may occur because a husband does not want to share a large asset like a bank account or a piece of real estate with his wife, as is usually required in divorces. Also, one spouse may want to artificially deflate his income for the purposes of determining alimony or child support. Although it is not uncommon for a spouse to try to hide assets in a divorce, there are steps that a vigilant party can take to try to uncover this. Also, it is risky to try to hide assets in your divorce because there can be very serious penalties, including monetary sanctions.

Proving Money Is Inherited

Each state has its own laws regarding the division of marital property in a divorce. Community property states, which stand in the minority, require courts to divide an estate equally, whereas equitable distribution states -- the majority -- seek to divide estates equitably, or fairly. In both types of jurisdictions, inherited money is usually considered separate property and not divisible in divorce. The burden of proving that certain funds represent your inheritance, however, will likely rest on you.

Divorces With Sole Proprietorships

Divorce issues such as support and property division can be pretty clear-cut when a spouse works for someone else and his income is reported on a W-2. However, when he's a sole proprietor, this can muddy the waters. A sole proprietor's business is his personal business. There's no line separating the two, nor a specific entity, such as a corporation or partnership, with which the court must deal.

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